First Bancorp (the “Company”) (NASDAQ: FBNC), the parent company of First Bank, announced net income of $37.9 million, or $1.06 per diluted common share, for the three months ended September 30, 2022, compared to $36.6 million, or $1.03 per diluted common share for the three months ended June 30, 2022 (“linked quarter”) and $27.6 million, or $0.97 per diluted common share, recorded in the third quarter of 2021. For the nine months ended September 30, 2022, the Company recorded net income of $108.5 million, or $3.04 per diluted common share, compared to $85.1 million, or $2.99 per diluted common share for the nine months ended September 30, 2021.
On June 21, 2022, the Company announced that it had reached an agreement to acquire GrandSouth Bancorporation (“GrandSouth”), headquartered in Greenville, South Carolina, in an all-stock transaction. The Company has received regulatory approvals for the transaction. Approval by GrandSouth’s shareholders remains pending. The acquisition is expected to close early in January 2023. GrandSouth operates eight branches throughout South Carolina and currently has $1.3 billion in total assets, $995.1 million in loans, and $1.1 billion in deposits.
Richard H. Moore, CEO and Chairman of the Company, stated, “First Bank had another very solid quarter with increased core earnings. We had strong loan growth, our net interest margin expanded, and we continue to control expenses. We are glad to have received all regulatory approvals for our combination with GrandSouth and anticipate closing the transaction in January with system conversion in March 2023.”
Third Quarter 2022 Highlights
- Tax equivalent net interest margin increased 22 basis points to 3.40% for the quarter as compared to the second quarter of 2022.
- Loans yields increased to 4.49%, up 25 basis points from the linked quarter related to market rate increases and improved pricing on new loans.
- Cost of funds has remained low at 0.12% for the quarter.
- Annualized return on average assets of 1.42% and annualized return on average common equity of 13.84% reported for the quarter ended September 30, 2022.
- Annualized loan growth for the quarter was 17.9% with total loans in excess of $6.5 billion.
- Credit quality continues to be strong with decreases in nonperforming assets (“NPA”) for the third straight quarter. The NPA to total assets ratio declined to 0.39% as of September 30, 2022 from 0.48% for the comparable period of 2021.
- Capital remains strong with a total common equity Tier 1 ratio of 12.78% and a total risk-based capital ratio of 14.86% as of September 30, 2022.
- Quarterly cash dividend of $0.22 per share declared, a 10% increase over the dividend rate in the comparable quarter of 2021.
The following discussions and comparisons to the prior year financial periods presented are impacted by the Company’s acquisition of Select Bancorp, Inc. (“Select”) completed in the fourth quarter of 2021 which contributed $1.3 billion in loans and $1.6 billion in deposits as of the acquisition date.
Net Interest Income and Net Interest Margin
Net interest income for the third quarter of 2022 was $85.3 million, a 45.7% increase from the $58.6 million recorded in the third quarter of 2021 and a 9.0% increase from the linked quarter. The increase in net interest income from the prior year period was due in large part to higher earning assets related to both organic growth and the Select acquisition. Average interest-earning assets for the third quarter of 2022 increased 29.6% from the comparable period of the prior year, with growth in both loans and investment securities.
Also contributing to the increase in net interest income year-over-year was the higher net interest margin (“NIM”). The Company’s tax-equivalent NIM (calculated by dividing tax-equivalent net interest income by average earning assets) for the third quarter of 2022 was 3.40%, compared to 3.18% for the linked quarter and 3.03% for the third quarter of 2021. The higher NIM for each period was driven by the increase in market interest rates as the Federal Reserve’s monetary policies resulted in a 300 basis point rise in short-term rates between March and September 2022. Loan yields increased from 4.19% for the third quarter of 2021 to 4.49% for the current period. Partially offsetting the rise in rates was lower fees from PPP loans which are included in interest income and which declined to $0.3 million for the third quarter of 2022 compared to $2.1 million for the prior year period. The Company has been able to maintain a low cost of funds at 0.12% for the quarter ended September 30, 2022, essentially unchanged from the prior year.
Allowance for Credit Losses, Provisions for Credit Losses, and Asset Quality
For the three months ended September 30, 2022, the Company recorded $5.1 million in provision for credit losses. This is compared to no provision for credit losses for the second quarter of 2022 and a release of provisions of $(1.4) million for the third quarter of 2021. Fluctuations each period are based on loan growth during the period, changes in the levels of nonperforming loans, economic forecasts impacting loss drivers, and other assumptions and inputs to the CECL model.
Also during the third quarter of 2022, the Company recorded $0.3 million in provision for unfunded commitments, compared to no provision for unfunded commitments for the linked quarter and a provision of $1.0 million for the third quarter of 2021. The reserve for unfunded commitments totaled $12.3 million at September 30, 2022 and is included in the line item “Other Liabilities”.
Asset quality remains strong with annualized net loan charge-offs of 0.04% for the third quarter of 2022. Total NPAs amounted to $40.7 million at September 30, 2022, or 0.39% of total assets, down from $41.1 million at the end of the linked quarter, and $40.7 million, or 0.48% of total assets, at September 30, 2021.
Total noninterest income for the third quarter of 2022 was $16.9 million, a 2.4% increase from the $16.5 million recorded for the third quarter of 2021 and a 2.0% decrease from the linked quarter. The primary factors driving fluctuations among the periods presented were as follows:
- Increases in “Service charges on deposit accounts” in the third quarter compared to the linked quarter and the prior year period were driven by the Select acquisition and related increases in the number of new customers and transaction accounts, combined with continued organic growth in transaction accounts.
- Fluctuations in “Other service charges, commission and fees” were related to higher volumes of activity in each period offset by lower interchange fees effective in July 2022 as a result of the Durbin Amendment limitations.
- Fees from presold mortgages amounted to $0.4 million for the third quarter of 2022, a decrease of 17.2% from the linked quarter, and a decrease of 82.1% from the $2.1 million recorded in the third quarter of 2021. Mortgage loan refinancing and origination volumes have declined significantly due to increases in mortgage interest rates.
- Commissions from sales of insurance and financial products amounted to $1.4 million for the third quarter of 2022, an increase of 20.9% as compared to the linked quarter and a 16.1% increase from the third quarter of 2021 driven by higher volume of transactions.
- SBA consulting fees declined $0.6 million for the third quarter of 2022 as compared to the prior year as a direct result of lower PPP-related revenue.
- SBA loan sale gains amounted to $0.5 million for the third quarter of 2022 compared to $0.8 million for the linked quarter and $1.7 million in the third quarter of 2021. The decrease was related to the fluctuations in the timing of sales and the volume of originated loans available to be sold in each period.
- Other gains amounted to $2.7 million for the third quarter of 2022 and $6.0 million for the first nine months of 2022, primarily related to death benefits realized on bank-owned life insurance policies. Also included in other gains for the third quarter of 2022 was a settlement of prior year cash letter processing differences.
Noninterest expenses amounted to $48.7 million for the third quarter of 2022, compared to $49.4 million for the linked quarter and $40.8 million for the third quarter of 2021. The 19.3% increase in noninterest expenses from the prior year period was driven by higher operating expenses, including additional locations and personnel, resulting from the Select acquisition. The reduction in employee benefits from the linked quarter was driven by fluctuations in the timing and volume of claims paid under our self-insured health insurance plan.
Balance Sheet and Capital
Total assets at September 30, 2022 amounted to $10.5 billion, a 23.9% increase from a year earlier. The year to date growth was driven by a combination of organic loan and deposit growth earlier in the year, as well as the acquisition of Select.
Total investment securities increased $209.4 million from September 30, 2021 to total $2.9 billion at September 30, 2022, as the Company invested cash from higher levels of deposits realized in 2021. The decline in investment securities from the linked quarter is due in large part to the utilization of cash flows from investments to fund loan growth. Also contributing to the decline was the increase in unrealized losses on available for sale securities which totaled $464.6 million at quarter end.
Total loans amounted to $6.5 billion at September 30, 2022, an increase of $1.7 billion, or 34.0%, from September 30, 2021, due in large part to the Select acquisition. Organic loan growth for the third quarter of 2022 amounted to $282.1 million, an annualized growth rate of 18.1%, and totaled $443.6 million year to date for 2022, a 9.7% annualized growth rate.
Total deposits amounted to $9.2 billion at September 30, 2022, an increase of $1.8 billion, or 24.2%, from September 30, 2021. While deposits have continued to grow for the year to date period, the third quarter of 2022 realized a decline in total deposits of $130.5 million as market rates for deposits have become more competitive and customer behaviors may be shifting from activity experienced during the pandemic.
The Company remains well-capitalized by all regulatory standards, with an estimated Total Risk-Based Capital Ratio at September 30, 2022 of 14.86% compared to 14.77% reported at September 30, 2021. The Company’s tangible common equity to tangible assets ratio was 5.98% at September 30, 2022, a decrease of 236 basis points from a year earlier, with the decline driven by the higher unrealized loss on available for sale securities included in equity.
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First Bancorp is a bank holding company headquartered in Southern Pines, North Carolina, with total assets of $10.5 billion. Its principal activity is the ownership and operation of First Bank, a state-chartered community bank that operates 108 branches in North Carolina and South Carolina. First Bank also provides SBA loans to customers through its nationwide network of lenders – for more information on First Bank’s SBA lending capabilities, please visit www.firstbanksba.com. First Bancorp’s common stock is traded on The NASDAQ Global Select Market under the symbol “FBNC.”